Document
Index

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q
(mark one)

þ     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended February 25, 2017

OR

¨     Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to ____________

Commission File Number:  000-04892

CAL-MAINE FOODS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
64-0500378
(State or other jurisdiction of incorporation or organization)
 
(I.R.S Employer Identification No.)

3320 Woodrow Wilson Avenue, Jackson, Mississippi  39209
(Address of principal executive offices) (Zip Code)

(601) 948-6813
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ      No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
    
Large Accelerated filer þ
 
Accelerated filer  ¨
 
 
 
Non – Accelerated filer ¨
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨    No þ

There were 43,776,551 shares of Common Stock, $0.01 par value, and 4,800,000 shares of Class A Common Stock, $0.01 par value, outstanding as of March 24, 2017.


Index

CAL-MAINE FOODS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED FEBRUARY 25, 2017

 
 
 
 
Page Number
Part I.
 
 
 
 

 
 
 
 
 

Item 1.
 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

Item 2.
 
 

 
 
 
 
 

Item 3.
 
 

 
 
 
 
 

Item 4.
 
 

 
 
 
 
 
Part II.
 
 
 
 

 
 
 
 
 

Item 1.
 
 

 
 
 
 
 

Item 1A.
 
 

 
 
 
 
 

Item 2.
 
 

 
 
 
 
 

Item 6.
 
 

 
 
 
 
 

 
 
 



Index

PART I.  FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
February 25, 2017
 
May 28, 2016
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
31,905

 
$
29,046

Investment securities available-for-sale
 
157,670

 
360,499

Trade and other receivables (less allowance for doubtful accounts of
 
 

 
 

$368 and $727 at February 25, 2017 and May 28, 2016, respectively)
 
79,179

 
67,448

Income tax receivable
 
49,919

 
11,830

Inventories
 
163,818

 
154,799

Prepaid expenses and other current assets
 
2,310

 
2,661

Total current assets
 
484,801

 
626,283

Property, plant and equipment, net
 
461,378

 
392,274

Goodwill
 
35,432

 
29,196

Other investments
 
68,832

 
53,975

Other intangible assets, net
 
29,920

 
4,958

Other assets
 
4,912

 
5,079

TOTAL ASSETS
 
$
1,085,275

 
$
1,111,765

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
77,128

 
$
67,131

Current maturities of long-term debt
 
15,449

 
16,320

Total current liabilities
 
92,577

 
83,451

Long-term debt, less current maturities
 
7,302

 
9,250

Other noncurrent liabilities
 
6,834

 
6,321

Deferred income taxes
 
110,200

 
95,382

Total liabilities
 
216,913

 
194,404


 
 

 
 

Commitments and Contingencies - see Note 5
 


 


 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Common stock, $0.01 par value, 120,000 and 70,261 shares authorized and issued
 
 

 
 

at February 25, 2017 and May 28, 2016, respectively, and 43,777 and 43,737
 
 

 
 

shares outstanding at February 25, 2017 and May 28, 2016, respectively
 
703

 
703

Class A convertible common stock, $.01 par value, 4,800 shares authorized, issued
 
 

 
 

and outstanding at February 25, 2017 and May 28, 2016, respectively 
 
48

 
48

Paid-in capital
 
48,985

 
46,404

Retained earnings
 
840,517

 
890,440

Accumulated other comprehensive income (loss), net of tax
 
76

 
(48
)
Common stock in treasury at cost – 26,484 and 26,524 shares at February 25, 2017
 
 

 
 

and May 28, 2016, respectively
 
(23,913
)
 
(22,272
)
Total Cal-Maine Foods, Inc. stockholders’ equity
 
866,416

 
915,275

Noncontrolling interest in consolidated entities
 
1,946

 
2,086

Total stockholders’ equity
 
868,362

 
917,361

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,085,275

 
$
1,111,765

See Notes to Condensed Consolidated Financial Statements.

2

Index

CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

 
13 Weeks Ended
 
39 Weeks Ended
 
 
February 25, 2017
 
February 27, 2016
 
February 25, 2017
 
February 27, 2016
Net sales
 
$
306,540

 
$
449,760

 
$
799,929

 
$
1,605,630

Cost of sales
 
267,375

 
317,034

 
766,385

 
998,236

Gross profit
 
39,165

 
132,726

 
33,544

 
607,394

Selling, general, and administrative expense
 
43,738

 
46,955

 
125,985

 
135,356

Operating income (loss)
 
(4,573
)
 
85,771

 
(92,441
)
 
472,038

Other income (expense):
 
 
 
 
 
 

 
 

Interest income, net
 
411

 
1,377

 
2,283

 
2,020

Royalty income
 
381

 
362

 
1,111

 
1,266

Patronage income
 
7,608

 
6,879

 
7,608

 
6,879

Equity in income of affiliates
 
1,018

 
1,542

 
1,854

 
3,574

Other, net
 
(680
)
 
1,584

 
(1,558
)
 
404

Total other income
 
8,738

 
11,744

 
11,298

 
14,143

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and noncontrolling interest
 
4,165

 
97,515

 
(81,143
)
 
486,181

Income tax expense (benefit)
 
34

 
33,173

 
(31,327
)
 
167,839

Net income (loss) before noncontrolling interest
 
4,131

 
64,342

 
(49,816
)
 
318,342

Less: Net income (loss) attributable to noncontrolling interest
 
(8
)
 
178

 
(9
)
 
1,925

Net income (loss) attributable to Cal-Maine Foods, Inc.
 
$
4,139

 
$
64,164

 
$
(49,807
)
 
$
316,417

 
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to Cal-Maine Foods, Inc.:
 
 
 
 
 
 

 
 

Basic
 
$
0.09

 
$
1.33

 
$
(1.03
)
 
$
6.57

Diluted
 
$
0.09

 
$
1.33

 
$
(1.03
)
 
$
6.54

Dividends per common share
 
$

 
$
0.441

 
$

 
$
2.175

Weighted average shares outstanding:
 
 
 
 
 
 

 
 

Basic
 
48,286

 
48,204

 
48,285

 
48,177

Diluted
 
48,417

 
48,367

 
48,285

 
48,359


See Notes to Condensed Consolidated Financial Statements.

3

Index

CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

 
13 Weeks Ended
 
39 Weeks Ended

 
February 25, 2017
 
February 27, 2016
 
February 25, 2017
 
February 27, 2016
Net income (loss), including noncontrolling interests
 
$
4,131

 
$
64,342

 
$
(49,816
)
 
$
318,342


 
 
 
 
 
 

 
 

Other comprehensive income (loss), before tax:
 
 
 
 
 
 

 
 


 
 
 
 
 
 

 
 

Unrealized holding gain (loss) on available-for-sale securities, net of reclassification adjustments
 
233

 
(897
)
 
199

 
(1,355
)

 
 
 
 
 
 

 
 

Income tax benefit (expense) related to items of other comprehensive income
 
(89
)
 
341

 
(75
)
 
521


 
 
 
 
 
 

 
 

Other comprehensive gain (loss), net of  tax
 
144

 
(556
)
 
124

 
(834
)

 
 
 
 
 
 

 
 

Comprehensive income (loss)
 
4,275

 
63,786

 
(49,692
)
 
317,508


 
 
 
 
 
 

 
 

Less: comprehensive income (loss) attributable to the noncontrolling interest
 
(8
)
 
178

 
(9
)
 
1,925


 
 
 
 
 
 

 
 

Comprehensive income (loss) attributable to Cal-Maine Foods, Inc.
 
$
4,283

 
$
63,608

 
$
(49,683
)
 
$
315,583


See Notes to Condensed Consolidated Financial Statements.

4

Index

CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
39 Weeks Ended

 
February 25, 2017
 
February 27, 2016
Operating activities:
 
 
 
 
Net income (loss) including noncontrolling interest
 
$
(49,816
)
 
$
318,342

Depreciation and amortization
 
35,724

 
33,185

Other adjustments, net
 
(43,125
)
 
(18,807
)
Net cash provided by (used in) operations
 
(57,217
)
 
332,720


 
 

 
 

Investing activities:
 
 

 
 

Purchase of investments
 
(25,872
)
 
(352,315
)
Sales of investments
 
228,327

 
221,879

Acquisition of business
 
(68,643
)
 

Investment in joint ventures
 
(17,700
)
 
(29,209
)
Purchases of property, plant and equipment
 
(54,862
)
 
(55,119
)
Payments received on notes receivable and from affiliates
 
5,236

 
4,677

Net proceeds from disposal of property, plant and equipment
 
76

 
2,724

Net cash provided by (used in) investing activities
 
66,562

 
(207,363
)

 
 

 
 

Financing activities:  
 
 

 
 

Purchase of common stock by treasury
 
(1,715
)
 
(1,831
)
Distributions to noncontrolling interests
 
(73
)
 
(903
)
Principal payments on long-term debt
 
(4,698
)
 
(23,620
)
Payments of dividends
 

 
(99,531
)
Net cash used in financing activities
 
(6,486
)
 
(125,885
)
Net change in cash and cash equivalents
 
2,859

 
(528
)

 
 

 
 

Cash and cash equivalents at beginning of period
 
29,046

 
8,667

Cash and cash equivalents at end of period
 
$
31,905

 
$
8,139


See Notes to Condensed Consolidated Financial Statements.


5

Index

CAL-MAINE FOODS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
February 25, 2017
(unaudited)
1.   Presentation of Interim Information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the results for the interim periods presented have been included. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions. These estimates and assumptions affected reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions.  Operating results for the thirteen and thirty-nine weeks ended February 25, 2017 are not necessarily indicative of the results that may be expected for the year ending June 3, 2017.  

The condensed consolidated balance sheet at May 28, 2016 was derived from the audited consolidated financial statements at that date.  It does not include all of the information and footnotes required by GAAP for complete financial statements. 

For further information, refer to the consolidated financial statements and footnotes thereto included in Cal-Maine Foods, Inc.'s annual report on Form 10-K for the fiscal year ended May 28, 2016. References to “we,” “us,” “our,” or the “Company” refer to Cal-Maine Foods, Inc.

2.   Acquisitions

Foodonics Acquisition

On October 16, 2016, the Company acquired substantially all of the egg production assets and assumed certain liabilities of Foodonics International, Inc. and its related entities doing business as Dixie Egg Company (collectively, "Foodonics") for $68.6 million of cash and $3.0 million of deferred purchase price. The acquired assets include commercial egg production and processing facilities with capacity for 1.6 million laying hens, contract grower arrangements for an additional 1.5 million laying hens, and related feed production, milling and distribution facilities in Georgia, Alabama, and Florida. The Company also acquired Foodonics' interest in American Egg Products, LLC ("AEP") and the Eggland's Best franchise with licensing rights for certain markets in Alabama, Florida, and Georgia as well as Puerto Rico, Bahamas and Cuba. The Company now owns 100% of AEP. The acquired operations of Foodonics are included in the accompanying financial statements as of October 16, 2016.

Pending the finalization of the Company's valuation, the following table presents the preliminary fair values of the assets acquired and liabilities assumed (in thousands):
Inventory
 
$
7,669

Property, plant and equipment
 
38,683

Intangible assets
 
24,000

Liabilities assumed
 
(2,005
)
Total identifiable net assets
 
68,347

Goodwill
 
3,296

Purchase price
 
71,643

Deferred purchase price
 
(3,000
)
Cash consideration paid
 
$
68,643



6

Index

Happy Hen Acquisition

On February 19, 2017, the Company assumed operational control of substantially all of the egg production, processing and distribution assets of Happy Hen Egg Farms, Inc. and its affiliates (collectively, "Happy Hen"). The assets include commercial egg production and processing facilities with current capacity for 350,000 laying hens and related distribution facilities located near Harwood and Wharton, Texas. The site is designed for capacity of up to 1.2 million laying hens. The operations of Happy Hen are included in the accompanying financial statements as of February 19, 2017. The purchase price is recorded in "Accounts payable and other accrued expenses" on the Company's Condensed Consolidated Balance Sheet as of February 25, 2017. The Company closed this acquisition on March 3, 2017.

Pending the finalization of the Company's valuation, the following table presents the preliminary fair values of the assets acquired (in thousands):

Inventory
 
$
609

Property, plant and equipment
 
11,259

Intangible assets
 
2,400

Total identifiable net assets
 
14,268

Goodwill
 
2,940

Purchase price
 
$
17,208


These fair value measurements were primarily based on significant inputs that are not observable in the markets.  The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was utilized for certain property, plant and equipment.  The cost to replace given assets reflects the estimated reproduction or replacement cost of the asset, less an allowance for loss in value due to depreciation.  The market approach, which indicates value for a subject asset based on available market pricing for comparable assets, was utilized for inventory and the Eggland's Best franchise of Foodonics. The cost of the Eggland's Best franchise will be amortized over a period of 15 years. Customer relationships and trademarks will be amortized over a period of 8 years. Non-compete agreements will be amortized over a period of 10 years. Goodwill on business combination recognizes the difference in the fair value of the assets acquired and liabilities assumed, net of the acquisition price. Goodwill associated with the acquisition is tax deductible over 15 years.

Pro-forma information, which is usually presented for information purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been completed as of an earlier time, was not material to the Company's Condensed Consolidated Financial Statements.

3.   Stock Based Compensation

Total stock based compensation expense for the thirty-nine weeks ended February 25, 2017 and February 27, 2016 was $2.5 million and $2.2 million, respectively. 

Unrecognized compensation expense as a result of non-vested shares of the 2012 Omnibus Long-Term Incentive Plan at February 25, 2017 was $6.9 million and will be recorded over a weighted average period of 2.3 years.  Refer to Note 11 of our May 28, 2016 audited financial statements for further information on our stock compensation plans.

At February 25, 2017, there were 247,735 restricted shares outstanding, with a weighted average grant date fair value of $42.76 per share. A summary of the Company’s restricted share activity for the thirty-nine weeks ended February 25, 2017 follows:

7

Index


 
Number of Shares
 
Weighted Average Grant Date Fair Value
Outstanding, May 28, 2016
 
288,900

 
$
35.97

Granted
 
86,215

 
43.00

Vested
 
(121,148
)
 
26.90

Forfeited
 
(6,232
)
 
39.66

Outstanding, February 25, 2017
 
247,735

 
$
42.76


4.   Inventories

Inventories consisted of the following (in thousands):

 
February 25, 2017
 
May 28, 2016
Flocks
 
$
98,822

 
$
94,312

Eggs and egg products
 
16,297

 
11,519

Feed and supplies
 
48,699

 
48,968


 
$
163,818

 
$
154,799


We grow and maintain flocks of layers (mature female chickens), pullets (young female chickens, under 18 weeks of age), and breeders (male and female chickens used to produce fertile eggs to hatch for egg production flocks). Our total flock at February 25, 2017, consisted of approximately 8.5 million pullets and breeders and 38.1 million layers.

5.   Contingencies

Financial Instruments
The Company maintained standby letters of credit (“LOC”) totaling $3.7 million at February 25, 2017.  The LOCs are collateralized with cash which is included in the line item “Other assets” in the Condensed Consolidated Balance Sheets.    The outstanding LOCs are for the benefit of certain insurance companies, and are not recorded as a liability on the consolidated balance sheets.

Legal Contingencies
The Company is a defendant in certain legal actions, and intends to vigorously defend its position in these actions.  If the Company’s assessment of a contingency indicates it is probable a material loss has been incurred and the amount of the liability can be reasonably estimated, the estimated liability is accrued in the Company’s financial statements.    If the assessment indicates a potential material loss contingency is not probable, but is reasonably possible, or probable but cannot be reasonably estimated, then the nature of the contingent liability, together with an estimate of the possible loss or range of possible loss will be disclosed, or a statement will be made that such an estimate cannot be made.

These legal actions are discussed in detail at Part II, Item 1, of this report.


8

Index

6.   Net Income (Loss) per Common Share  

Basic net income (loss) per share was calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.  Diluted net income (loss) per share was calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period plus the dilutive effects of options and restricted stock.  Due to the net loss in the thirty-nine weeks ended February 25, 2017, restricted shares in the amount of 145,044 were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive.  The computations of basic and diluted net income (loss) per share attributable to the Company are as follows (in thousands, except per share data):


 
13 Weeks Ended
 
39 Weeks Ended

 
February 25, 2017
 
February 27, 2016
 
February 25, 2017
 
February 27, 2016
Net income (loss) attributable to Cal-Maine Foods, Inc.
 
$
4,139

 
$
64,164

 
$
(49,807
)
 
$
316,417


 
 
 
 
 
 

 
 

Basic weighted-average common shares
 
48,286

 
48,204

 
48,285

 
48,177

Effect of dilutive securities:
 
 
 
 
 
 

 
 

Restricted shares
 
131

 
163

 

 
182

Dilutive potential common shares
 
48,417

 
48,367

 
48,285

 
48,359


 
 
 
 
 
 

 
 

Net income (loss) per common share
 
 
 
 
 
 

 
 

attributable to Cal-Maine Foods, Inc.:
 
 
 
 
 
 

 
 

Basic
 
$
0.09

 
$
1.33

 
$
(1.03
)
 
$
6.57

Diluted
 
$
0.09

 
$
1.33

 
$
(1.03
)
 
$
6.54


7.   Accrued Dividends Payable and Dividends per Common Share

We make an accrual of dividends payable at the end of each quarter according to the Company’s dividend policy adopted by its Board of Directors. The Company pays a dividend to shareholders of its Common Stock and Class A Common Stock on a quarterly basis for each quarter for which the Company reports net income attributable to Cal-Maine Foods, Inc. computed in accordance with generally accepted accounting principles in an amount equal to one-third (1/3) of such quarterly income. Dividends are paid to shareholders of record as of the 60th day following the last day of such quarter, except for the fourth fiscal quarter.  For the fourth quarter, the Company pays dividends to shareholders of record on the 65th day after the quarter end. Dividends are payable on the 15th day following the record date. Following a quarter for which the Company does not report net income attributable to Cal-Maine Foods, Inc., the Company will not pay a dividend for a subsequent profitable quarter until the Company is profitable on a cumulative basis computed from the date of the last quarter for which a dividend was paid. Therefore, the Company did not pay a dividend with respect to the fourth quarter of fiscal 2016, or the first and second quarters of fiscal 2017, and will not pay a dividend for the third quarter of fiscal 2017. At February 25, 2017, cumulative losses that must be recovered prior to paying a dividend were $50.2 million.    When applicable, the amount of the accrual appears on the Condensed Consolidated Balance Sheets as “Accrued dividends payable.”


9

Index

On our condensed consolidated statement of operations, we determine dividends per common share in accordance with the computation in the following table (in thousands, except per share data):

 
13 Weeks Ended
 
39 Weeks Ended

 
February 25, 2017
 
February 27, 2016
 
February 25, 2017
 
February 27, 2016
Net income (loss) attributable to Cal-Maine Foods, Inc.
 
$
4,139

 
$
64,164

 
$
(49,807
)
 
$
316,417


 
 

 
 

 
 
 
 
1/3 of net income attributable to Cal-Maine Foods, Inc. available for dividend
 

 
21,388

 

 
105,472


 
 

 
 

 
 
 
 
Common stock outstanding (shares)
 
43,777

 
43,738

 
 
 
 
Class A common stock outstanding (shares)
 
4,800

 
4,800

 
 
 
 
Total common stock outstanding (shares)
 
48,577

 
48,538

 
 
 
 

 
 

 
 

 
 
 
 
Dividends per common share*
 
$

 
$
0.441

 
$

 
$
2.175


*Dividends per common share = 1/3 of Net income (loss) attributable to Cal-Maine Foods, Inc. available for dividend ÷ Total common stock outstanding (shares). At February 25, 2017 , cumulative losses that must be recovered prior to paying a dividend were $50.2 million.


8.   Fair Value Measurements

The Company is required to categorize both financial and nonfinancial assets and liabilities based on the following fair value hierarchy.  The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable, and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3 - Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The disclosure of fair value of certain financial assets and liabilities that are recorded at cost are as follows:
Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments.

Long-term debt: The carrying value of the Company’s long-term debt is at its stated value.  We have not elected to carry our long-term debt at fair value.  Fair values for debt are based on quoted market prices or published forward interest rate curves, which are level 2 inputs.  Estimated fair values are management’s estimate, which is a level 3 input; however, when there is no readily available market data, the estimated fair values may not represent the amounts that could be realized in a current transaction, and the fair values could change significantly. The fair value and carrying value of the Company’s borrowings under its long-term debt were as follows (in thousands):

 
February 25, 2017
 
May 28, 2016

 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
5.4% – 6.4% Notes payable
 
$
20,980

 
$
21,028

 
$
25,570

 
$
25,824

4.9% – 5.97% Capital leases payable
 
1,771

 
1,589

 

 


 
$
22,751

 
$
22,617

 
$
25,570

 
$
25,824



10

Index

Assets and Liabilities Measured at Fair Value on a Recurring Basis
In accordance with the fair value hierarchy described above, the following table shows the fair value of financial assets and liabilities measured at fair value on a recurring basis as of February 25, 2017 and May 28, 2016 (in thousands):
໿
 
 
 
 
 
 
 
 
Total
February 25, 2017
 
Level 1
 
Level 2
 
Level 3
 
Balance
Assets
 
 

 
 

 
 

 
 

US government and agency obligations
 

 
$
17,062

 

 
$
17,062

Municipal bonds
 

 
47,011

 

 
47,011

Corporate bonds
 

 
85,752

 

 
85,752

Foreign government obligations
 

 
2,008

 

 
2,008

Asset backed securities
 

 
5,837

 

 
5,837

Mutual funds
 
2,487

 

 

 
2,487

Total assets measured at fair value
 
$
2,487

 
$
157,670

 

 
$
160,157

໿
 
 
 
 
 
 
 
 
Total
May 28, 2016
 
Level 1
 
Level 2
 
Level 3
 
Balance
Assets
 
 

 
 

 
 

 
 

US government and agency obligations
 
$

 
$
18,814

 
$

 
$
18,814

Municipal bonds
 

 
79,643

 

 
79,643

Corporate bonds
 

 
240,537

 

 
240,537

Foreign government obligations
 

 
2,046

 

 
2,046

Asset backed securities
 

 
15,893

 

 
15,893

Mutual funds
 
5,503

 

 

 
5,503

Total assets measured at fair value
 
$
5,503

 
$
356,933

 
$

 
$
362,436


Investment securities – available-for-sale, classified as level 2, consist of U.S. government and agency obligations, taxable and tax exempt municipal bonds, zero coupon municipal bonds, foreign government obligations, asset backed securities and corporate bonds with maturities of three months or longer when purchased. We classify these securities as current, because amounts invested are available for current operations. Observable inputs for these securities are yields, credit risks, default rates, and volatility.

໿
໿
9.   Investment Securities

The following represents the Company’s investment securities as of February 25, 2017 and May 28, 2016 (in thousands):
February 25, 2017
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
US government and agency obligations
 
$
17,089

 
$

 
$
27

 
$
17,062

Municipal bonds
 
46,981

 
30

 

 
47,011

Corporate bonds
 
85,703

 
49

 

 
85,752

Foreign government obligations
 
2,009

 

 
1

 
2,008

Asset backed securities
 
5,837

 

 

 
5,837

Total current investment securities
 
$
157,619

 
$
79

 
$
28

 
$
157,670


 
 

 
 

 
 

 
 

Mutual funds
 
$
1,751

 
$
736

 
$

 
$
2,487

Total noncurrent investment securities
 
$
1,751

 
$
736

 
$

 
$
2,487


11

Index

May 28, 2016
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
US government and agency obligations
 
$
18,809

 
$
5

 
$

 
$
18,814

Municipal bonds
 
79,481

 
162

 

 
79,643

Corporate bonds
 
240,593

 

 
56

 
240,537

Foreign government obligations
 
2,044

 
2

 

 
2,046

Asset backed securities
 
15,908

 

 
15

 
15,893

Mutual funds
 
3,565

 
1

 

 
3,566

Total current investment securities
 
$
360,400

 
$
170

 
$
71

 
$
360,499


 
 

 
 

 
 

 
 

Mutual funds
 
$
1,448

 
$
489

 
$

 
$
1,937

Total noncurrent investment securities
 
$
1,448

 
$
489

 
$

 
$
1,937


Proceeds from sales of available-for-sale securities were $228.3 million and $221.9 million during the thirty-nine weeks ended February 25, 2017 and February 27, 2016, respectively. Gross realized gains during the thirty-nine weeks ended ended February 25, 2017 and February 27, 2016 were $231,000 and $100,000, respectively.  Gross realized losses during the thirty-nine weeks ended February 25, 2017 and February 27, 2016 were $6,000 and $102,000, respectively. For purposes of determining gross realized gains and losses, the cost of securities sold is based on the specific identification method.

Unrealized holding gains and (losses), net of taxes, for the thirty-nine weeks ended February 25, 2017 and February 27, 2016 were as follows (in thousands):
 
 
39 Weeks Ended
 
 
February 25, 2017
 
February 27, 2016
Current investments
 
$
(30
)
 
$
(740
)
Noncurrent investments
 
154

 
(94
)
Total unrealized holding gains (losses)
 
$
124

 
$
(834
)

Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Contractual maturities at February 25, 2017, are as follows (in thousands):

 
Estimated Fair Value
Within one year       
 
$
84,966

1-5 years
 
72,704

Total
 
$
157,670


໿

12

Index

10.   Equity

The following reflects the equity activity, including our noncontrolling interest, for the thirty-nine weeks ended February 25, 2017 (in thousands):
໿

 
Cal-Maine Foods, Inc. Stockholders
 
 
 
 

 
Common Stock
 
 
 
 
 
 
 
 

 
 

 
Class A
 
Treasury
 
Paid In
 
Accum. Other
 
Retained
 
Noncontrolling
 
 

 
Amount

 
Amount
 
Amount
 
Capital
 
Comp. Income
 
Earnings
 
Interest
 
Total
Balance at May 28, 2016
 
$
703

 
$
48

 
$
(22,272
)
 
$
46,404

 
$
(48
)
 
$
890,440

 
$
2,086

 
$
917,361

Other comprehensive income, net of tax
 

 

 

 

 
124

 

 

 
124

Grant of restricted stock
 

 

 
78

 
(78
)
 

 

 

 

Forfeiture of restricted stock
 

 

 
(4
)
 
4

 

 

 

 

Buyback of 39,913 shares to satisfy withholding obligation in connection with the vesting of restricted stock
 

 

 
(1,715
)
 

 

 

 

 
(1,715
)
Distribution to noncontrolling interest partners
 

 

 

 

 

 

 
(73
)
 
(73
)
Restricted stock compensation
 

 

 

 
2,481

 

 

 

 
2,481

Reclass of equity portion of American Egg Products in connection with acquisition, see Note 2
 

 

 

 

 

 
58

 
(58
)
 

Cumulative adjustment to restricted stock compensation from the adoption of ASU 2016-09
 

 

 

 
174

 

 
(174
)
 

 

Net income
 

 

 

 

 

 
(49,807
)
 
(9
)
 
(49,816
)
Balance at February 25, 2017
 
$
703

 
$
48

 
$
(23,913
)
 
$
48,985

 
$
76

 
$
840,517

 
$
1,946

 
$
868,362


11. Subsequent Event

Subsequent to February 25, 2017, the Company received payment of claims related to the Deepwater Horizon Economic and Property Damages Settlement Program (the "Settlement Program"). Our recovery, net of applicable fees, was $5.5 million and will be recorded in our fourth quarter results.

13

Index


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains numerous forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) relating to our shell egg business, including estimated production data, expected operating schedules, projected construction costs, and other operating data, including anticipated results of operations and financial condition.  Such forward-looking statements are identified by the use of words such as “believes,” “intends,” “expects,” “hopes,” “may,” “should,” “plans,” “projected,” “contemplates,” “anticipates,” or similar words.  Actual production, operating schedules, capital costs, results of operations, and other projections and estimates could differ materially from those projected in the forward-looking statements.  The forward-looking statements are based on management’s current intent, belief, expectations, estimates, and projections regarding the Company and its industry.  These statements are not guarantees of future performance and involve risks, uncertainties, assumptions, and other factors that are difficult to predict and may be beyond our control.  The factors that could cause actual results to differ materially from those projected in the forward-looking statements include, among others, (i) the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 28, 2016, as updated by our subsequent Quarterly Reports on Form 10-Q, (ii) the risks and hazards inherent in the shell egg business (including disease, pests, weather conditions, and potential for product recall), (iii) changes in the demand for and market prices of shell eggs and feed costs, (iv) our ability to predict and meet demand for cage-free and other specialty eggs, (v) risks, changes, or obligations that could result from our future acquisition of new flocks or businesses and risks or changes that may cause conditions to completing a pending acquisition not to be met, and (vi) adverse results in pending litigation matters.  Readers are cautioned not to place undue reliance on forward-looking statements because, while we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate.  Further, forward-looking statements included herein are only made as of the respective dates thereof, or if no date is stated, as of the date hereof.  Except as otherwise required by law, we disclaim any intent or obligation to update publicly these forward-looking statements, whether because of new information, future events, or otherwise.

OVERVIEW

Cal-Maine Foods, Inc. (“we,” “us,” “our,” or the “Company”) is primarily engaged in the production, grading, packaging, marketing, and distribution of fresh shell eggs.  Our fiscal year end is the Saturday closest to May 31.
 
Our operations are fully integrated.  At our facilities we hatch chicks, grow and maintain flocks of pullets (young female chickens, under 18 weeks of age), layers (mature female chickens) and breeders (male and female birds used to produce fertile eggs to hatch for egg production flocks), manufacture feed, and produce, process, and distribute shell eggs. We are the largest producer and marketer of shell eggs in the United States (U.S.).  We market the majority of our shell eggs in the southwestern, southeastern, mid-western, and mid-Atlantic regions of the U.S.  We market shell eggs through an extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, foodservice distributors, and egg product consumers.    

The Company has one operating segment, which is the production, grading, packaging, marketing and distribution of shell eggs.  The majority of our customers rely on us to provide most of their shell egg needs, including specialty and non-specialty eggs. Specialty eggs represent a broad range of products.  We classify nutritionally enhanced, cage free, organic and brown eggs as specialty products for accounting and reporting purposes. We classify all other shell eggs as non-specialty products.  While we report separate sales information for these types of eggs, we note there are a number of cost factors which are not specifically available for non-specialty or specialty eggs due to the nature of egg production. We manage our operations and allocate resources to these types of eggs on a consolidated basis based on the demands of our customers.
 

14

Index

Our operating results are directly tied to egg prices, which are highly volatile and subject to wide fluctuations, and are outside of our control. For example, the annual average Urner-Barry Southeastern Regional Large Egg Market Price per dozen eggs, for our fiscal years 2005-2016 ranged from a low of $0.72 in fiscal year 2005 to a high of $2.97 in fiscal year 2016.  The shell egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss. In the past, during periods of high profitability, shell egg producers tended to increase the number of layers in production with a resulting increase in the supply of shell eggs, which generally caused a drop in shell egg prices until supply and demand returned to balance.  As a result, our financial results from year to year may vary significantly.   Shorter term, retail sales of shell eggs historically have been greatest during the fall and winter months and lowest during the summer months.  Prices for shell eggs fluctuate in response to seasonal factors and a natural increase in shell egg production in the spring and early summer.  Shell egg prices tend to increase with the start of the school year and are highest prior to holiday periods, particularly Thanksgiving, Christmas, and Easter.  Consequently, we generally experience lower sales and net income in our first and fourth fiscal quarters ending in August and May, respectively. Because of the seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons.  

From April through June 2015, our industry experienced a significant avian influenza (“AI”) outbreak, primarily in the upper Midwestern U.S.  Based on several published industry estimates, we believe approximately 12% of the national flock of laying hens was affected.  The affected laying hens were either destroyed by the disease or euthanized.  During April through June 2015, the USDA data showed the supply of laying hens decreased substantially, and then began to recover and approach pre-AI levels.

In February 2017, the USDA issued revised data that showed the size of the laying hen flock for calendar years 2015 and 2016 was meaningfully higher in both years than previously reported. At March 1, 2017, the national laying hen flock according to the U.S. Department of Agriculture was approximately 3.1% higher than the AI reduced flock on March 1, 2016.  

Egg prices increased significantly during the summer and fall of 2015. The average Urner-Barry Thursday price for the large market (i.e. conventional shell eggs) in the southeastern region for the months of June through November 2015 was $2.32 per dozen, with a peak of $2.97 in August.  Subsequent to November 2015, shell egg prices declined.  The Urner Barry price index hit a decade-low level in our fiscal 2016 fourth quarter. During our first quarter of fiscal 2017 it increased slightly, but remained at significantly lower levels than the corresponding period of last year.  During our fiscal 2017 second quarter, it returned to and dropped below the low levels seen during the fiscal 2016 fourth quarter. Early in our fiscal 2017 third quarter we saw a significant increase but prices dropped again after Christmas.

According to Nielsen data, retail customer demand for shell eggs has remained strong. The USDA reports that egg export demand has improved since the beginning of fiscal 2017, however, it has still not fully recovered from levels prior to the AI outbreak. Additionally, we have experienced reduced demand for egg products, as many of our commercial customers reformulated their products to use fewer eggs when prices spiked and have been slow to resume previous egg usage. Together, these factors have created an oversupply of eggs, with continued pressure on market prices. However, recent USDA reports show the chick hatch has been trending down, suggesting there may be a moderation in the size of the laying hen flock as the year progresses.  We expect the egg markets to remain under pressure and we do not expect to see any meaningful improvement until there is a better balance of supply and demand. Accordingly, our net average selling prices for shell eggs for the third quarter and year to date periods of fiscal 2017 were $1.130 and $1.020 compared with $1.568 and $1.919 for the corresponding periods of fiscal 2016, respectively.

Over the past month, there have been reported outbreaks of AI in certain poultry operations located in southeastern states. None of these outbreaks have affected the commercial laying hen flock, and there have been no positive tests for AI at any of our locations. Since the spring 2015 AI outbreaks, we have significantly enhanced biosecurity measures at all of our locations, and our flocks are being monitored and tested according to state and federal guidelines. We continue to work closely with state and federal agencies and other interested parties to monitor developments and seek to prevent the occurrence of the disease at our facilities.


15

Index

We are one of the largest producers and marketers of value-added specialty shell eggs in the U.S. They have been a significant and growing portion of the market in recent years. During our fiscal 2016 a number of large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to a cage-free egg supply chain by specified future dates. We are working with our customers to achieve smooth progress in meeting their goals. Our focus for future expansion at our farms will be environments that are cage-free or with equipment that can easily be converted to cage-free, based on a timeline to meet our customer’s needs.

For the thirteen weeks ended February 25, 2017, we produced approximately 84% of the total number of shell eggs we sold.  This compares to 77% in the comparable prior year period.  For the thirteen weeks ended February 25, 2017, approximately 7% of such production was provided by contract producers who utilize their facilities in the production of shell eggs by layers owned by us compared to 4% for the same period of last year. We own the shell eggs produced under these arrangements.

Our cost of production is materially affected by feed costs.  Feed costs averaged approximately 58% of our total farm egg production cost for the thirteen and thirty-nine weeks ended February 25, 2017. Changes in market prices for corn and soybean meal, the primary ingredients in the feed we use, result in changes in our cost of goods sold.   The cost of our feed ingredients, which are commodities, are subject to factors over which we have little or no control such as volatile price changes caused by weather, size of harvest, transportation and storage costs, demand and the agricultural and energy policies of the U.S. and foreign governments.  Increased U.S. acreage and large per acre yields for both corn and soybeans in 2016 should provide adequate domestic supplies for both of our primary feed ingredients.  

During the second quarter of fiscal 2017, the Company acquired substantially all of the egg production assets of Foodonics International, Inc. and its related entities doing business as Dixie Egg Company ("Foodonics") for $68.6 million of cash and $3.0 million of deferred purchase price. The acquired assets include commercial egg production and processing facilities with capacity for 1.6 million laying hens, contract grower arrangements for an additional 1.5 million laying hens, and related feed production, milling and distribution facilities in Georgia, Alabama, and Florida. The Company also acquired Foodonics' interest in American Egg Products, LLC ("AEP") and the Eggland's Best franchise with licensing rights for portions of certain markets in Alabama, Florida, and Georgia as well as Puerto Rico, Bahamas and Cuba. The Company now owns 100% of AEP. The acquired operations of Foodonics are included in the accompanying financial statements as of October 16, 2016, the effective date of the transaction.

During the third quarter of fiscal 2017, the Company assumed operational control of substantially all of the egg production, processing and distribution assets of Happy Hen Egg Farms, Inc. and its affiliates (collectively, "Happy Hen"). The assets include commercial egg production and processing facilities with current capacity for 350,000 laying hens and related distribution facilities located near Harwood and Wharton, Texas. The site is designed for capacity of up to 1.2 million laying hens. The operations of Happy Hen are included in the accompanying financial statements as of February 19, 2017. The purchase price is recorded in "Accounts payable and other accrued expenses" on the Company's Condensed Consolidated Balance Sheet as of February 25, 2017. The Company closed this acquisition on March 3, 2017.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales.


16

Index


 
13 Weeks Ended
 
39 Weeks Ended

 
February 25, 2017
 
February 27, 2016
 
February 25, 2017
 
February 27, 2016
Net sales
 
100.0
 %
 
100.0
%
 
100.0
 %
 
100.0
%
Cost of sales
 
87.2
 %
 
70.5
%
 
95.8
 %
 
62.2
%
Gross profit
 
12.8
 %
 
29.5
%
 
4.2
 %
 
37.8
%
Selling, general, and administrative expense
 
14.3
 %
 
10.4
%
 
15.7
 %
 
8.4
%
Operating income (loss)
 
(1.5
)%
 
19.1
%
 
(11.5
)%
 
29.4
%
Other income (expense), net
 
2.9
 %
 
2.6
%
 
1.4
 %
 
0.9
%
Income (loss) before income taxes and noncontrolling interest
 
1.4
 %
 
21.7
%
 
(10.1
)%
 
30.3
%
Income tax expense (benefit)
 
 %
 
7.4
%
 
(3.9
)%
 
10.5
%
Net income (loss) before noncontrolling interest
 
1.4
 %
 
14.3
%
 
(6.2
)%
 
19.8
%
Less: Net income (loss) attributable to noncontrolling interest
 
 %
 
%
 
 %
 
0.1
%
Net income (loss) attributable to Cal-Maine Foods, Inc.
 
1.4
 %
 
14.3
%
 
(6.2
)%
 
19.7
%

NET SALES

Shell eggs and egg products made up approximately 98% and 2% of net sales, respectively, for the thirteen weeks ended February 25, 2017.  Net sales for the thirteen weeks ended February 25, 2017 were $306.5 million, a decrease of $143.3 million, or 31.8%, compared to net sales of $449.8 million for the thirteen weeks ended February 27, 2016, primarily due to the decrease in egg selling prices. Total dozens of shell eggs sold also decreased for the current thirteen-week period compared to the same period in fiscal 2016. Dozens sold for the third quarter of fiscal year 2017 were 263.6 million, a decrease of 14.0 million, or 5.0%, compared to 277.6 million for the third quarter of fiscal 2016 resulting in a decrease in net sales of $15.8 million

Net average selling price per dozen of shell eggs for the thirteen weeks ended February 25, 2017 was $1.130, compared to $1.568 for the thirteen weeks ended February 27, 2016, a decrease of 27.9%, resulting in a corresponding decrease in net shell egg sales of $121.6 million.  Net average selling price is the blended price for all sizes and grades of shell eggs, including non-graded shell egg sales, breaking stock, and undergrades.    

Egg products and other revenues decreased $5.9 million for the thirteen weeks ended February 25, 2017 compared to the same period of last year.

For the thirty-nine weeks ended February 25, 2017, approximately 98% of net sales were shell eggs and approximately 2% were egg products. Net sales for the thirty-nine weeks ended February 25, 2017 were $799.9 million a decrease of $805.7 million, or 50.2%, compared to $1,605.6 million for the thirty-nine weeks ended February 27, 2016, primarily due to the decrease in egg selling prices. Total dozens of shell eggs sold also decreased for the current thirty-nine week period compared to the same period in fiscal 2016. Dozens sold for the thirty-nine weeks ended February 25, 2017 were 758.1 million, a decrease of 42.4 million, or 5.3%, compared to 800.5 million for the same period of fiscal 2016 resulting in a decrease in net sales of $43.3 million.

For the thirty-nine weeks ended February 25, 2017, our net average selling price per dozen of shell eggs was $1.020 compared to $1.919 for the same period of fiscal 2016, a decrease of 46.8%, resulting in a corresponding decrease in net shell egg sales of $719.7 million.

Egg products and other revenues decreased $43.9 million for the thirty-nine weeks ended February 25, 2017 compared to the same period of fiscal 2016.

The table below represents an analysis of our non-specialty and specialty shell egg sales (in thousands, except percentage data).  Following the table is a discussion of the information presented in the table.

17

Index


 
13 Weeks Ended
 
39 Weeks Ended

 
February 25, 2017
 
February 27, 2016
 
February 25, 2017
 
February 27, 2016
Total net sales
 
$
306,540

 
 
 
$
449,760

 
 
 
$
799,929

 
 
 
$
1,605,630

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-specialty shell egg
 
$
166,893

 
55.6
%
 
$
286,725

 
65.6
%
 
$
403,404

 
51.6
%
 
$
1,079,495

 
69.9
%
Specialty shell egg
 
122,337

 
40.8
%
 
135,654

 
31.0
%
 
344,873

 
44.1
%
 
416,398

 
27.0
%
Co-pack specialty shell egg
 
8,522

 
2.8
%
 
12,017

 
2.7
%
 
25,492

 
3.3
%
 
40,262

 
2.6
%
Other
 
2,346

 
0.8
%
 
2,987

 
0.7
%
 
7,828

 
1.0
%
 
7,288

 
0.5
%
Net shell egg sales
 
$
300,098

 
100.0
%
 
$
437,383

 
100.0
%
 
$
781,597

 
100.0
%
 
$
1,543,443

 
100.0
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net shell egg sales as a percent  of total net sales
 
98
%
 
 
 
97
%
 
 
 
98
%
 
 
 
96
%
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dozens sold:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-specialty shell egg
 
196,998

 
74.7
%
 
206,670

 
74.4
%
 
571,111

 
75.3
%
 
601,208

 
75.1
%
Specialty shell egg
 
62,265

 
23.6
%
 
65,443

 
23.6
%
 
174,204

 
23.0
%
 
182,747

 
22.8
%
Co-pack specialty shell egg
 
4,350

 
1.7
%
 
5,461

 
2.0
%
 
12,799

 
1.7
%
 
16,565

 
2.1
%
Total dozens sold
 
263,613

 
100.0
%
 
277,574

 
100.0
%
 
758,114

 
100
%
 
800,520

 
100.0
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net average selling price
 
$
1.130

 
 
 
$
1.568

 
 
 
$
1.020

 
 

$
1.919

 
 

Non-specialty shell eggs include all shell egg sales not specifically identified as specialty shell egg sales.   The non-specialty shell egg market is characterized by an inelasticity of demand.   Small increases or decreases in production or demand can have a large positive or adverse effect on selling prices.  For the thirteen weeks ended February 25, 2017, non-specialty shell egg dozens sold decreased approximately 4.7%, and the average selling price decreased 38.7% to $0.859 from $1.402 for the same period of the prior year. For the thirty-nine weeks ended February 25, 2017, non-specialty shell egg dozens sold decreased approximately 5.0%, and the average selling price decreased 60.2% to $0.720 from $1.808 for the same period of fiscal 2016.

Specialty shell eggs continue to make up a large portion of our total shell egg revenue and dozens sold.  Specialty egg retail prices are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the perceived benefits from these products.  This was particularly evident in recent quarters as non-specialty egg prices declined more than specialty egg prices.  However, as non-specialty egg prices declined, we experienced some margin and volume pressures on specialty egg sales.  For the thirteen weeks ended February 25, 2017, specialty shell egg dozens sold decreased approximately 4.9%, and the average selling price decreased 5.2% to $1.965 from $2.073 for the same period of the prior year. For the thirty-nine weeks ended February 25, 2017, specialty shell egg dozens sold decreased 4.7%, and the average selling price decreased 13.1% to $1.980 from $2.279 for the same period of fiscal 2016.

Co-pack specialty shell eggs are sold primarily through co-pack arrangements, a common practice in the industry whereby production and processing of certain products is outsourced to another producer.  Shell egg sales in this category represented 4.4 million and 5.5 million dozen for the quarters ended February 25, 2017 and February 27, 2016, respectively,  primarily reflecting the loss of a portion of a major customer’s co-pack business.  Co-pack specialty shell eggs sold during the thirty-nine weeks ended February 25, 2017 and February 27, 2016, were 12.8 million and 16.6 million, respectively.

The shell egg sales classified as “Other” represent sales of hard cooked eggs, hatching eggs, and other miscellaneous products, which are included with our shell egg operations. 

Egg products are shell eggs that are broken and sold in liquid, frozen, or dried form.  Our egg products are sold through our consolidated subsidiaries American Egg Products, LLC (“AEP”) and Texas Egg Products, LLC (“TEP”).  For the third quarter of fiscal 2017, egg product sales were $6.4 million, a decrease of $5.9 million, or 47.9%, compared to

18

Index

$12.4 million for the same period of fiscal 2016. Pounds sold for the third quarter of fiscal year 2017 were 16.7 million pounds, an increase of 1.6 million pounds, or 10.5%, compared to 15.1 million pounds for the same quarter of fiscal 2016.  For the thirty-nine weeks ended February 25, 2017, egg product sales were $18.3 million, a decrease of $43.9 million, or 70.5%, compared to $62.2 million for the same period of 2016. Pounds sold for the thirty-nine weeks ended February 25, 2017 were 47.6 million, an increase of 3.7 million, or 8.3%, compared to 44.0 million for the same period of fiscal 2016. Selling prices for liquid and frozen egg products were down 72.5% for the year to date period of fiscal 2017 compared with the same period of last year.

COST OF SALES

Cost of sales consists of costs directly related to production, processing and packing shell eggs, purchases of shell eggs from outside producers, processing and packing of liquid and frozen egg products, and other non-egg costs.  Farm production costs are those costs incurred at the egg production facility, including feed, facility, hen amortization, and other related farm production costs.

The following table presents the key variables affecting cost of sales (in thousands, except cost per dozen data).
໿
໿
໿
໿

 
13 Weeks Ended
 
39 Weeks Ended

 
February 25, 2017
 
February 27, 2016
 
Percent Change
 
February 25, 2017
 
February 27, 2016
 
Percent Change
Cost of Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Farm production
 
$
151,478

 
$
147,482

 
2.7
 %
 
438,929

 
427,334

 
2.7
 %
Processing, packaging, and warehouse
 
53,038

 
48,447

 
9.5
 %
 
147,329

 
139,497

 
5.6
 %
Egg purchases and other (including change in inventory)
 
57,806

 
111,848

 
(48.3
)%
 
165,833

 
388,697

 
(57.3
)%
Total shell eggs
 
262,322

 
307,777

 
(14.8
)%
 
752,091

 
955,528

 
(21.3
)%
Egg products
 
4,959

 
9,157

 
(45.8
)%
 
13,691

 
42,111

 
(67.5
)%
Other
 
94

 
100

 
(6.0
)%
 
603

 
597

 
1.0
 %
Total
 
$
267,375

 
$
317,034

 
(15.7
)%
 
$
766,385

 
$
998,236

 
(23.2
)%

 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Farm production cost (per dozen produced)
 
 
 
 
 
 
 
 
 
 
 
 
Feed
 
$
0.396

 
$
0.414

 
(4.3
)%
 
$
0.406

 
$
0.420

 
(3.3
)%
Other
 
0.290

 
0.281

 
3.2
 %
 
$
0.293

 
$
0.275

 
6.5
 %
Total
 
$
0.686

 
$
0.695

 
(1.3
)%
 
$
0.699

 
$
0.695

 
0.6
 %

 
 
 
 
 
 
 
 
 
 
 
 
Egg purchases (average cost per dozen)
 
$
1.10

 
$
1.51

 
(27.2
)%
 
$
1.04

 
$
1.90

 
(45.3
)%

 
 
 
 
 
 
 
 
 
 
 
 
Dozen produced
 
222,492

 
213,285

 
4.3
 %
 
633,246

 
620,356

 
2.1
 %
Dozen sold
 
263,613

 
277,574

 
(5.0
)%
 
758,114

 
800,520

 
(5.3
)%

Cost of sales for the third quarter of fiscal 2017 was $267.4 million, a decrease of $49.7 million, or 15.7%, compared to cost of sales of $317.0 million for the same quarter of fiscal 2016.  The decrease was primarily driven by a decrease in the cost of egg purchases during the quarter, including eggs purchased by our egg products divisions.   Feed cost per dozen for the fiscal 2017 third quarter was $0.396, compared to $0.414 per dozen for the comparable fiscal 2016 quarter, a decrease of 4.3% resulting in a decrease in cost of sales of $4.0 million for the thirteen weeks ended February 25, 2017 compared with the same period of fiscal 2016.  Other farm production cost increased 3.2% to $0.290 for the third quarter of 2017, compared to $0.281 for the same period of last year primarily due to increased layer hen amortization expense and facility costs related to capital improvement and conversion projects.


19

Index

For the thirty-nine weeks ended February 25, 2017, total cost of sales was $766.4 million, a decrease of $231.9 million, or 23.2%, from $998.2 million for the same period of fiscal 2016. Similar to the thirteen week period, the decrease was driven by a decrease in the cost of egg purchases during the period, including eggs purchased by our egg products divisions. Feed cost per dozen for thirty-nine weeks ended February 25, 2017, was $0.406, compared to $0.420 per dozen for the comparable period of fiscal 2016, a decrease of 3.3%, resulting in a decrease in cost of sales of $8.9 million for the comparable periods. Other farm production cost increased 6.5% to $0.293 for the thirty-nine weeks ended February 25, 2017, compared to $0.275 for the same period of last year primarily due to increased layer hen amortization expense and facility costs related to capital improvement and conversion projects.

Gross margin decreased from 29.5% for the third quarter of fiscal 2016 to 12.8% for the thirteen weeks ended February 25, 2017 primarily due to the decreased average customer selling prices and decreased sales volumes.  For the thirty-nine weeks ended February 25, 2017, gross profit was 4.2% compared to 37.8% for the same period of fiscal 2016, primarily due to the decreased average customer selling prices.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general, and administrative expenses include costs of marketing, distribution, accounting, and corporate overhead.  The following table presents an analysis of our selling, general, and administrative expenses (in thousands). 

 
13 Weeks Ended

 
February 25, 2017
 
February 27, 2016
 
$ Change
 
% Change
Specialty egg expense
 
$
15,329

 
$
17,458

 
$
(2,129
)
 
(12.2
)%
Delivery expense
 
13,875

 
12,781

 
1,094

 
8.6
 %
Payroll and overhead
 
6,783

 
10,016

 
(3,233
)
 
(32.3
)%
Stock compensation expense
 
823

 
732

 
91

 
12.4
 %
Other expenses
 
6,928

 
5,968

 
960

 
16.1
 %
Total
 
$
43,738

 
$
46,955

 
$
(3,217
)
 
(6.9
)%


For the thirteen weeks ended February 25, 2017, selling, general, and administrative expense was $43.7 million, a decrease of 6.9%, compared to $47.0 million for the thirteen weeks ended February 27, 2016.  Specialty egg expense decreased $2.1 million compared to the same period of last year, a decrease of 12.2%.  Specialty egg expense typically fluctuates with specialty egg dozens sold which decreased 4.9% for the current quarter compared to the same period of last year.  Franchise fees, which is a component of specialty egg expense, decreased 14.0%, compared to higher than normal amounts in fiscal 2016. Payroll and overhead decreased $3.2 million, or 32.3%, compared to the same period of last year primarily due to reduced bonus accruals in the current period.  As a percentage of net sales, payroll and overhead was 2.2% for the third quarter of fiscal 2017 compared to 2.2% for the same period of last year. Delivery expense increased $1.1 million, or 8.6%, compared to the same period of last year primarily due to an increase in delivery personnel and fuel costs.


 
39 Weeks Ended

 
February 25, 2017
 
February 27, 2016
 
$ Change
 
% Change
Specialty egg expense
 
$
42,158

 
$
47,527

 
$
(5,369
)
 
(11.3
)%
Delivery expense
 
39,570

 
37,684

 
1,886

 
5.0
 %
Payroll and overhead
 
23,945

 
29,698

 
(5,753
)
 
(19.4
)%
Stock compensation expense
 
2,480

 
2,176

 
304

 
14.0
 %
Other expenses
 
17,832

 
18,271

 
(439
)
 
(2.4
)%
Total